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McConnell’s rejection of federal aid for states risks causing a depression, analysts say

Congressional leaders are divided over issuing a rescue package to states facing bankruptcy due to coronavirus. (Video: Reuters)
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Senate Majority Leader Mitch McConnell (R-Ky.) would rather see states declare bankruptcy than give them federal aid to deal with the economic collapse triggered by the coronavirus pandemic.

That’s a recipe for turning a potentially short recession into a prolonged depression, according to officials and analysts.

The question of whether Congress and the White House should provide relief funding to state and local governments — as the feds have done already for private business — is about to reach a showdown in Washington.

The stakes are high in our region, where state and local officials say that without federal action they will have to make even deeper cuts than feared in core services such as education, housing and health programs (apart from those required to fight the virus).

Governors on April 26 pushed back on Sen. Mitch McConnell’s (R-Ky.) suggestion that states should file for bankruptcy amid the coronavirus outbreak. (Video: The Washington Post)

Governors, mayors and county leaders of both parties are clamoring for help in the next federal rescue package after McConnell and President Trump blocked such assistance in the $484 billion bill approved last week.

Trump and Congress spar over next coronavirus economic package.

House Speaker Nancy Pelosi (D) says the next bill must include state and local aid, but Trump has sent mixed signals about whether he will support it. McConnell and many other Senate Republicans are resisting.

“It’s a very grim situation we’re facing,” Maryland Comptroller Peter Franchot (D) said. “There’s a blizzard of blank checks going to big companies and big banks and other entities. We need one more and we need it quickly.”

Maryland says the shutdown could cost it as much as $2.8 billion in lost tax revenue in just four months — from March through June.

“I would describe this as worse than the 2008-2009 recession,” Franchot said. “That was a huge fiscal and monetary catastrophe, but we didn’t see 340,000 Marylanders file for unemployment in three weeks.”

In an earlier relief package passed last month, Congress approved $150 billion for state and local governments — but with an important condition. It said the money could be spent only to cover new costs of fighting the virus, and not to replace revenue lost because of the economic slump. State and local leaders are calling for the next bill to eliminate that restriction.

Pelosi: No more virus bailouts without state and local aid

“We’re not going to get out of this pandemic and this budget mess unless the people on the ground instead of people in Washington, D.C., are given flexibility to use the money as they know how to help the economy recover,” Fairfax County Board Chairman Jeff C. McKay (D-At Large) said.

Fairfax is projected to lose at least $165 million over 12 months because of plunging sales tax receipts and other effects of the shutdown. It already has dropped plans to increase spending on affordable housing, early-childhood education and police body cameras.

A few weeks ago, Maryland Gov. Larry Hogan (R), in his role as head of the National Governors Association, asked for $500 billion to help states stabilize decimated budgets.

But the White House and Senate Republicans blocked such aid in last week’s package.

They said they feared that states and localities would move more slowly to reopen their economies if they received federal assistance. State and local leaders retorted that they will open their economies as soon as public health authorities say it’s safe to do so.

“Every elected official wants to reopen their economy,” said Matthew Chase, executive director of the National Association of Counties. “We are incredibly disappointed that we are left behind and asked to wait for the next package.”

The other argument against federal aid, voiced by McConnell, is that it would bail out states that he said have mismanaged their finances in the past, such as by incurring large pension obligations for teachers and other public employees. In a radio interview Wednesday, McConnell suggested instead that states declare bankruptcy.

A bind for area governments: Virus shrinks their budgets just as public need soars

“I would certainly be in favor of allowing states to use the bankruptcy route,” McConnell said. “My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of.”

The comment drew widespread backlash.

“This is grossly irresponsible with a naive sense of what state and local governments do,” tweeted Amy Liu, director of the Brookings Metropolitan Policy Program. “Without emergency relief as their revenues crater, state and local governments will not be able to run key programs like unemployment insurance, social services, housing assistance and small business outreach needed to protect people and businesses in this crisis. … The lack of federal aid to state and local governments may force premature reopening of the economy when [covid-19] cases are still rising.”

State and local governments employ 13 percent of the U.S. workforce, making them a significant economic sector.

“If you want to send the country into an extended depression, sending state and local governments into bankruptcy is a great way to do it,” said a local government budget expert, who spoke on the condition of anonymity because they were not authorized to speak publicly.

Our region’s state and local governments are bracing for severe spending cuts, with the burden expected to fall heavily on two areas that make up a large part of their budgets — education and health care.

Virginia has already suspended plans to increase spending on K-12 education by $540 million over two years, higher education by $356 million and Medicaid by $207 million.

“If you look at what happened in the last recession, it gives you a preview of what would happen if there’s not additional federal state fiscal relief,” Commonwealth Institute President Michael Cassidy said. “In the last recession, Virginia cut state funding for public education more deeply than only a small handful of states. … It was very much a lost decade of public school investment.”

The District is projected to lose $1.5 billion in revenue over the next 17 months. Barring substantial federal aid or tax increases, cuts are expected to fall heavily on affordable housing, education and services that help low-income residents, according to Tazra Mitchell, policy director of the D.C. Fiscal Policy Institute.

The city has been doubly hurt by the Senate’s insistence on shortchanging it by $700 million in the March relief package. Republicans treated the District as a territory, which received less money than states. They did so even though the District is typically treated as a state in such bills, and D.C. residents pay federal income taxes, unlike residents of territories such as Puerto Rico.

In Maryland, one of the hardest hit counties is Prince George’s, where the economic shock has led more than 40,000 people to file for unemployment in the last six weeks. That’s about double the 21,000 new jobs created in the last five years, a record in which the county took considerable pride.

“Our trajectory was heading upward, and the coronavirus interrupted it,” County Executive Angela D. Alsobrooks (D) said. “We, like our neighbors, want the federal government to assist us as it’s assisting businesses.”

She said the county would be “dogged” about keeping a tight rein on spending, partly to protect its valued Triple-A bond rating.

McConnell’s attacks on states’ fiscal management drew sharp rebukes from area officials. They noted that Virginia, Maryland and the District also have Triple-A bond ratings. Additionally, states, unlike Congress, are required to balance their budgets.

McKay noted: “Fairfax has a Triple-A bond rating and a balanced budget. Compare that to Mitch McConnell’s record on deficits. It’s laughable.”